A coal train loads up at Peabody Energy Corp.'s Rawhide mine in the Powder River Basin in September 2017 with the Dry Fork coal-fired power plant in the background. Future retrofits on coal plants and other carbon capture projects could benefit from the tax equity market, proponents say. |
The extension of federal tax credits for carbon capture, use and storage could open up a tax equity market that might help spur the development of projects in the U.S., proponents say.
Congress extended the 45Q tax benefits for carbon capture and storage projects in February as part of the Bipartisan Budget Act of 2018. Along with eliminating a 75 million-ton cap for the tax credits, the bill increases the credits available for carbon captured and used for enhanced oil recovery from $10 per ton to $35 per ton and ups credits for geological carbon storage from $20 per ton to $50 per ton.
Julio Friedmann, CEO of energy consultancy Carbon Wrangler LLC and a former U.S. Department of Energy official, said the companies developing CCS technology should have a much easier time raising capital thanks to the 45Q credits.
One way new projects could get off the ground involves the tax equity exchange market, where an entity with a large tax liability might sponsor or partner with a CCS developer in order to reap a project's tax rewards.
Big coal-fired power plants that emit and capture 5 million tons of carbon dioxide a year could generate $250 million worth of tax credits — "real money" that will encourage project development, said Friedmann, who was principal deputy assistant secretary for the DOE's Office of Fossil Energy in the Obama administration.
However, developers interested in retrofitting a coal-fired plant with CCS technology might not generate nearly enough revenue to take advantage of all the credits.
"Most of the people who own the assets or who are developing projects don't have the tax appetite to be able to cash in that much over 12 years," Friedmann said, referring to the new 45Q expiration of 2030. "Having a tax refund of half a billion dollars does not help you if your annual revenue is $20 million."
Hunter Johnston, a partner in Steptoe & Johnson LLP's Washington, D.C., office who has been involved in a project to capture carbon dioxide from synthetic gas in Louisiana, said the capital expense involved in building carbon capture projects could leave developers with too little taxable income to value the credits.
In order to make sure the benefit does not go to waste, Friedmann and Johnston believe that tax equity partnerships, similar to those employed in the renewable energy sector, could develop around carbon capture projects.
"The viability of that tax equity market and the structures that have been employed for renewable projects is the first place where any developer for a carbon capture project would look," Johnston said.
Large oil companies interested in carbon capture for enhanced oil recovery purposes might already have the tax liabilities to take full advantage of 45Q tax credits, he said. Other potential investors include multinational banks with lots of tax liability, or companies motivated by climate objectives such as Google or Apple.
Finding a way to transfer tax equity could encourage retrofits at coal-fired plants that have a long capital life remaining, such as the multi-owned Colstrip plant in Montana, Friedmann said.
Jeff Erikson, the general manager of client engagement at the Global CCS Institute, said he has heard there will be no "immediate rush in commitments" for new carbon capture projects, and it will likely be 12 to 18 months before the impact of the 45Q extension becomes clear.
However, he said proponents of the technology are re-examining shelved projects to see if they now work.
With wind tax credits scheduled to phase out through 2019, Johnston said carbon capture projects could replace wind on the tax equity market, which is "in a transition space right now."
While tax benefits might help attract investors to CCS projects, reducing the overall cost of the projects remains a challenge.
Angelos Kokkinos, director of the DOE's Office of Advanced Fossil Technology Systems, told S&P Global Market Intelligence that the 45Q extension should be attractive to industry, and generate renewed interest in carbon capture and enhanced oil recovery.
"However, the cost of capture from fossil-based power generation plants needs to be lower if the captured CO2 is to be competitive with other sources. While the tax credit certainly improves the business case, reducing the cost of capture remains a key challenge to wide implementation of CCS in the U.S.," he said.

